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Who Said Data Centers Weren't Sexy?

With a big question mark still hanging over consumer spending, data centers may drive the tech turnaround.

Enterprise IT companies may not have the star quality of their consumer counterparts, but they could offer upside for embattled investors heading into the earnings season.



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that consumers' tech spending is holding up better than businesses', there are still worrying signs about the state of consumer confidence. Earlier this week, for example, the U.S. government reported that retail sales were down in March, and the European Central Bank warned that the slump in U.S. consumer spending is continuing.

Last month a survey by the Consumer Electronics Association and publisher


revealed that tech spending continued to nosedive, hitting its lowest level since the research began more than two years ago.

Data center hardware and software are unlikely to grab as many headlines as the latest smartphone and

video game

technology, but they may offer some respite in an unforgiving economy.


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and software giant


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, for example, have all enjoyed recent share growth.

"We expect a solid March quarter from IBM," wrote Goldman Sachs analyst David Bailey, in a note released Tuesday, pointing to the fact that IBM's shares have risen around 18% this year. "We expect the stock to continue to outperform most other areas in tech given its earnings resiliency, even as IT demand remains weak."

The company, which is said to have

walked away

from purchasing

Sun Microsystems


is expected to post revenue of $22.55 billion and earnings of $1.66 a share when it reports its first-quarter results on Monday.

IBM's long-term prospects are boosted by its software and services business, which help it withstand the vagaries of hardware spending. During the fourth quarter, the firm's software revenue grew 3%, or 9% adjusted for currency, compared to a loss of 20%, or 16% accounting for currency, in its systems and technology group.

Long-term, the Armonk, N.Y.-based company is well-positioned to reap the benefits of President Obama's ambitious economic stimulus plans, which extend from manufacturing to broadband networks and healthcare.

"I think that software and networking services is where the value add and the rich margins are going to be for companies in our economy," said George Calhoun, professor of business and technology at Stevens Institute in Hoboken, N.J. "If I was building a hospital now and I wanted someone to help me put the information systems in, I would probably call IBM."

Calhoun, who is a former IBM shareholder and customer, told

that the company is one of a handful of tech firms that can tie together a bewildering array of networking, storage and server technologies.

"The really hard issue in technology systems is not which box to buy, but how to put them all together," he said. "IBM is pre-eminent in this role

although H-P is trying to be a player there."

Another hardware company that may offer upside to investors is EMC, which has enjoyed a 23% rise in its share price this year. Analysts are forecasting revenue of $3.25 billion and earnings of 17 cents a share when the storage leviathan reports its first-quarter results next week, according to Yahoo! Finance.

Like many tech firms, EMC has felt the


of the economic slowdown, but recently unveiled its

V-Max system

, which it is touting as the world's largest storage array.

"We believe V-Max provides EMC with a new talking point at hosted service providers," wrote Jayson Noland, an analyst at R.W. Baird, in a note released earlier this week. With EMC's support for


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recently launched

Unified Computing System (UCS)

, V-Max will also challenge storage rival


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, he added.

Although hardly as sexy as consumer electronics, storage offers companies like EMC a recurring revenue stream as customers look to store ever-increasing data volumes. The firm's core information storage business, for example, accounts for almost 80% of its revenue.

"Though customers are exercising more discretion, they continue to purchase additional storage infrastructure," wrote Noland, maintaining his "outperform" rating and $14 price target for EMC.

Although not a hardware player, EMC's VMware subsidiary is also attracting attention on account of its position in the virtualization market. The software firm's shares have risen more than 28% since the start of April, and the company is preparing to launch a new version of its software next week.

"The stock is likely to continue to outperform broader tech going forward, given the higher growth profile of virtualization and VMware's dominance," wrote Goldman Sachs analyst David Bailey, but warned that investors should not get carried away. "With VMware shares up 28% over the past two weeks versus the Nasdaq up 6%, we think much of the March quarter is already reflected in the share price, and we do not expect to see a significant lift to the shares coming out of earnings."

Analysts are predicting revenue of $474.38 million and earnings of 20 cents a share for VMware's first-quarter results, which are to be announced next week.

"We believe VMware can deliver EPS outperformance -- we've heard from ourchecks that the company has held the line on costs and has slowed hiring" wrote Jefferies & Company analyst Katherine Egbert in a note released Thursday.

However, the analyst expects VMware to have trouble matching the high level of software licensing it experienced in its March 2008 quarter, although this should be offset by strong revenue from small- to medium-sized businesses.